Versloot Dredging v HDI Gerling Industrie Versicherung
Versloot Dredging BV & Anor v HDI Gerling Industrie Versicherung AG & Ors
English High Court: Queen’s Bench Division: Commercial Court; Popplewell J;  EWHC 1667 (Comm); 14 June 2013
MARINE INSURANCE: WHETHER CLAIM BY OWNERS WAS AN INSURED PERIL: WHETHER OTHERWISE VALID CLAIM BY OWNERS FORFEIT DUE TO OWNERS' FRAUDULENT DEVICE: ELEMENTS OF DEFENCE OF FRAUDULENT DEVICE: APPLICATION OF DEFENCE OF FRAUDULENT DEVICE
Mr Chirag Karia QC and Mr Tom Bird, instructed by Sach Solicitors for Versloot Dredging and SO DC Merwestone BV
Mr Nigel Jacobs QC and Mr Ben Gardner, instructed by Ince & Co for HDI Gerling Industrie Versicherung and six co-Defendants
Plaintiff shipowners' claim under a time policy with the Defendant underwriters was held to arise from an insured peril (ingress of water into the ship, without want of due diligence on the part of the Owners) but failed because Owners had employed fraudulent devices in support of their claim. The entire claim was accordingly forfeit.
Case Note contributed by Ervin Tan, B.A. (First Class) Oxon., based in Singapore.
Plaintiff Owners of the DC MERWESTONE (“the Vessel”) had insured the Vessel under a time policy (the “Policy”) for 12 months at 1 April 2009. On 28 January 2010 the Vessel was off the coast of Poland, shortly after commencing a laden voyage from Klaipeda, Lithuania, to Bilbao, Spain, when she suffered an ingress of water which flooded the engine room, and incapacitated the Vessel. The Vessel's main engine was damaged beyond repair, and the Owners claimed €3,241,310.60 under the policy for the resultant loss.
The cause of the ingress of water was not substantially in dispute: when the Vessel arrived at Klaipeda, the weather was exceptionally cold (between minus 10°C and minus 35°C) and the crew used the Vessel's emergency fire pump and lines to blast away ice chipped off from the hatch covers. Seawater remained in the emergency fire pump, and when the water froze and expanded, the expansion caused a crack in the casing of the emergency fire pump and distorted the bar restraining the lid on the filter at the inlet side of the pump. The lid no longer formed a seal with the filter, and as the ice melted, seawater leaked in through the crack and the filter.
A lack of watertight integrity of the bulkheads within the Vessel allowed the water from the emergency fire pump, to seep through more than half the length of the Vessel, and into the engine room. Further, the pumping system in the engine room was defective and the pumps were unable to cope with the rate of ingress of water (which they would have done had they not been defective).
On 21 April 2010, Chris Kornet, a director of Rederij Chr. Kornet & Zonen B.V., managers hired by the Owners of the Vessel (the “Managers”), sent a letter to the Underwriters' solicitors stating (falsely) that the bilge alarm had gone off at about noon on 28 January 2010; that the alarm had been ignored because it was attributed to the rolling of the vessel in heavy weather and that he had been told both these things by the Master or crew. Chris Kornet repeated in substance the same false statements in a letter dated 27 July 2010 to the first Defendant as lead underwriter.
In response to the Owners' claim, the Defendant underwriters denied that the loss was caused by an insured peril; argued that the loss was caused by the unseaworthiness of the Vessel to which the assured was privy; and finally contended that the claim was forfeit because the presentation of the claim was supported by fraudulent statements.
The judge had to determine the following broad issues: first, whether the loss was an insured loss within the time policy; second, whether the loss resulted from want of due diligence by the Owners or their Managers and, thirdly, whether the Owners had forfeited the claim by reason of the fraudulent devices employed by their Managers in support of the claim.
In summary, Popplewell J found in favour of the Owners in respect of the first and second broad issues, and concluded that “the Owners have a valid claim for €3,241,310.60 under the policy unless it is forfeit by their having employed a fraudulent device in pursuit of the claim” [fn.1]. It was this last issue which caused the Plaintiff shipowners to forfeit their otherwise valid claim, and it is therefore this issue that is the focus of this note.
Use of fraudulent devices
Popplewell J began by reiterating the rule of law that “even when there is no express clause in the policy... an insured who has made a fraudulent claim forfeits any lesser claim which he could properly have made” (citing Lek v Matthews [fn.2]). Crucially, Popplewell J considered himself bound by the Court of Appeal's extension of the rule in Agapitos v Agnew [fn.3] to include “cases in which the assured has deployed in support of a wholly valid claim some fraudulent means or device to advance the claim”, even if that aspect of the Court of Appeal's decision was obiter.
This extension reflects a policy of the law to discourage the making of fraudulent claim, and is designed to prevent the assured from being in a situation where “if the fraud is successful, then [he] will gain; if it is unsuccessful, [he] will lose nothing” (quoting Lord Hobhouse in Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd (The Star Sea) [fn.4]). Mance LJ in Agapitos further acknowledged that the extension was “deliberately designed to operate in a draconian and deterrent fashion” and thereby to “discourage any feeling that the genuine part of a claim can be regarded as safe – and that any fraud will lead at best to an unjustified bonus and at worst, in probability, to no more than a refusal to pay a sum which was never insured in the first place” [fn.5]. Crucially, counsel for the Plaintiffs reserved his right to challenge the extension of the rule in a higher court, hence this aspect of the case should be watched keenly.
Popplewell J proceeded to consider two sub-issues: first, what was the state of mind which was sufficient to make the claim “fraudulent”; and second, what was the relationship which the fraudulent device had to bear to the valid claim.
The test laid down by Mance LJ in Agapitos was that “a fraudulent device is used if the insured believes that he has suffered the loss claimed, but seeks to improve or embellish the facts surrounding the claim, by some lie”. In the absence of any elaboration of the meaning of “lie”, Popplewell J applied the well-known speech of Lord Herschell in Derry v Peek that “fraud is proved when it is shewn that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false” [fn.6]. It was for the underwriters to prove fraud on a balance of probabilities, and the “cogency and strength of the evidence required to prove fraud is heightened by the seriousness of the allegation” (applying Re H [fn.7]).
On the facts, Mr Chris Kornet, a director of the Managers, had represented to the underwriters' solicitors that on the day of the casualty, (a) a bilge alarm had sounded at around noon; (b) the alarm had not been investigated because the vessel was rolling in heavy weather; and (c) that he had been informed of the former two facts by the Master. The first representation was found to be false; Popplewell J held that it was “an untruth told recklessly in support of the claim” and it followed that so were the rest of the representations.
In respect of the relationship between the fraud and the valid claim, the fraudulent part of the claim must be substantial in the sense of being not insubstantial or immaterial or de minimis. Whether the fraudulent part of the claim was “substantial” was a question to be addressed “by reference only to the fraudulent element, not by reference to the proportion which the fraudulent element bore to the valid element of the claim”; hence a fraudulent claim for a small sum of money (relative to a much larger sum being validly claimed) was sufficiently serious to be stigmatised as a breach of good faith so as to engage the rule (applying Galloway v Guardian Royal Exchange (UK) Ltd [fn.8]).
Upon reviewing the authorities, Popplewell J considered that he should apply the test of materiality as laid down by Mance LJ in Agapitos, namely, that “fraudulent means or devices are sufficient to vitiate a valid claim if: (1) they are directly related to the claim and intended to promote the claim; and (2) the fraudulent means or devices would, if believed, tend, objectively and prior to any final determination at trial of the parties' rights, to yield a not insignificant improvement in the insured's prospects, whether they be prospects of obtaining a settlement, or a better settlement, or of winning at trial. In this context “not insignificant” has the same connotation as “not insubstantial”, “not immaterial”, “not de minimis”, which is the test for the fraudulent claims rule, of which the rule as to fraudulent means and devices is to be treated as a subspecies.”
On the facts, Popplewell J held that the false representations made by Chris Kornet were “intended... to promote the claim in the hope of a prompt settlement and that the purported factual account about the noon alarm was part of that promotion” [fn.9], thus satisfying the materiality test laid down by Mance LJ in Agapitos. As a result, the Owners' otherwise valid claim was forfeit – a result which Popplewell J reached “with regret”, considering the fraudulent conduct in this case to be “at the low end” (being a “reckless untruth” rather than “a carefully planned deceit”) [fn.10].
This case is a cautionary tale for persons making marine insurance claims. It is, however, subject to appeal.
1.  of the judgment.
2. (1927) 29 Ll. L. Rep 141 (HL).
3.  QB 556.
4.  1 AC 469.
5. Axa General Insurance Ltd v Gottlieb  All ER 163 (CA).
6. (1889) 14 AC 337 at 374.
7.  AC 563 at 586.
8.  Lloyd's Rep IR 209 (CA).
9.  of the judgment.
10.  of the judgment.